David J. Blount, CFP®
LPL Financial Advisor
Doing taxes is like going to the dentist—you know you need to get it done, but it’s hard to muster the energy to actually make it happen. The lure of waiting until the last second of tax season is real, but did you know you could be missing out on huge saving potential by putting it off?
It’s okay if you didn’t know that—it’s what we’re here for. At Investment and Insurance Planning Services, LLC, our goal is to help you make sense of your taxes and save you more money that you can put toward the things you really care about. Here are 10 tips that can help the saving process right now!
Maximize Your Retirement Contributions
Maximizing your retirement contributions can provide a way to minimize your tax liability. This is because retirement plans offer useful tax advantages that are not available if you were to simply put your money in a savings account. There are several accounts to consider, depending on your unique circumstances:
401(k), 403(b), and 457 Plans: These accounts allow you to contribute up to $22,500 annually for 2023 ($30,000 if over age 50). Not only that but contributions done pre-tax won’t show up as part of your annual income. This can be a way to defer taxes until your retirement years when you could potentially be in a lower tax bracket.
Traditional IRA: Contributing to a traditional IRA is another way to reduce your tax liability if your income is within certain limits. You can contribute up to $6,500 for 2023, with a $1,000 catch-up contribution limit for those over age 50. Unlike the qualified retirement plans listed above, contributions to a traditional IRA can be made until the April 15th tax filing deadline.
Roth IRA: This is an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. The contribution limits are the same as traditional IRAs. However, Roth IRAs have income restrictions and you may not be able to open an account outright if you are above certain limits.
Individual (K) Plan: The Individual (K) Plan, also known as Solo (K) or Owner Only 401(K), is designed for self-employed business owners. It offers a great alternative to SEP-IRA and SIMPLE-IRA plans, as it allows for much higher contribution limits with the same amount of earned income. For instance, a business owner earning $100,000 can contribute $25,000 to a SEP-IRA, $22,000 to a SIMPLE-IRA, and $55,000 to an Individual (K) plan. This results in greater retirement savings and potentially lower taxes due to the higher tax-deductible contribution allowed by the Individual (K) plan. This type of plan is ideal for professionals such as lawyers, doctors, salespeople, freelance writers, consultants, accountants, contractors, and professors who have self-employed income.
Consider Roth Conversions
Roth IRAs allow your money to grow tax-free and avoid required minimum distributions when you retire. But there are income limits on who can contribute directly to a Roth IRA. If you make too much money to contribute to a Roth IRA, there are a few ways to get money into a Roth IRA indirectly:
Roth conversion - You can convert a traditional IRA to a Roth IRA by paying income tax on the amount converted. This allows you to get money from a traditional IRA, which has no income limits, into a Roth IRA subsequently accumulating tax free growth, non-taxable withdrawals, and no RMDs.
Mega backdoor Roth - If your 401(k) plan allows after-tax contributions, you can contribute up to $44,500 in 2023 beyond the normal pre-tax limit. You can then roll over the after-tax portion to a Roth IRA or Roth 401(k) to convert it to tax-free Roth dollars.
Backdoor Roth IRA - You make a non-deductible contribution to a traditional IRA and then immediately convert it to a Roth IRA. This works best if you don't already have other traditional IRAs.
The benefit of these strategies is that you can get money into the Roth IRA where it can then grow tax-free and be withdrawn tax-free. And you can avoid required minimum distributions in retirement, which helps if you expect to be in a higher tax bracket later.
Contribute to a Health Savings Account
An efficient but underutilized way to help optimize your savings and address your taxes is to contribute to a health savings account (HSA). HSAs offer triple tax savings: contributions are tax-deductible, earnings grow tax-free, and you can withdraw the funds tax-free to pay for medical expenses. Unused funds roll over each year and will essentially become an IRA at age 65, at which point you can withdraw funds penalty-free for non-medical expenses. You must be enrolled in a high-deductible health plan in order to qualify for an HSA.
HSAs can be a great tax-management tool if you are able to pay medical expenses out of pocket and leave the HSA funds to grow. The 2023 contribution limits for HSAs are $3,850 for individuals and $7,750 for families. If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You have until April 15th for your contributions to count for the previous year’s tax return.
Contribute to a Donor-Advised Fund
If you itemize your tax deductions because of charitable contributions, you may want to consider investing in a donor-advised fund (DAF). You can contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise.
You can also donate appreciated stock, which can further maximize your tax savings. By donating the appreciated position, you avoid paying the capital gain tax that would have been due upon sale of the stock and you are effectively donating more to your charities of choice than if you had sold the stock and donated the proceeds.
Make a Qualified Charitable Donation
If you are over age 70.5 and have a retirement account like an IRA, you can make donations directly from this account to a charity and get a tax benefit. This is called a qualified charitable distribution or QCD. A QCD lets you donate up to $100,000 per year from your IRA to a charity without having to pay income tax on the withdrawal. If you are married, your spouse can also donate up to $100,000 from their IRA.
The donation counts toward your required minimum distribution (RMD) that you have to take after age 73. But unlike an RMD, the QCD amount is not added to your taxable income for the year. A QCD also gives you an above-the-line deduction. This means you can claim it even if you don't itemize deductions on your tax return.
Utilize Tax-Loss Harvesting
Tax-loss harvesting is when you sell investments that have lost value to reduce the taxes you owe on investments that have gained value. This is done by using the loss to balance out the taxes owed on the gains. The investments that are sold are usually replaced with similar ones to keep your portfolio balanced.
With the extreme market volatility in 2023, you might have some losses that you can use to offset gains in your non-retirement accounts. For example, if you expect to make a big gain this year, you could sell a stock that isn’t doing well and use the loss to reduce your taxes.
Tax-loss harvesting can also be used to reduce your ordinary income tax liability if capital losses exceed capital gains. In this case, up to $3,000 can be deducted from your income, and capital losses in excess of this amount can be carried forward to later tax years.
Understand Long-Term vs. Short-Term Capital Gains
Understanding the tax implications of long-term versus short-term capital gains can go a long way in reducing your tax liability. For instance, in 2023 a married taxpayer will pay 0% capital gains tax on their long-term capital gains if their taxable income falls below $89,250. That rate jumps to 15% and 20% for taxable incomes that exceed $89,250 and $553,850, respectively. Understanding where you fall on the tax table is an important part of minimizing your liability.
Gains that are short term in nature (held less than one year) will be taxed at your marginal tax bracket, which could be up to 37%! Knowing both the nature of your gain, as well as your tax bracket, is crucial information if you want to minimize your tax liability.
Take a Qualified Business Income Deduction
If you own a business, you may be able to reduce your taxable income and save money on your taxes by taking a deduction called the Qualified Business Income Deduction (QBID). This deduction can be up to 20% of your business income, but there are limits if you make more than a certain amount. To qualify for this deduction, you may want to reduce or delay some of your income so that you stay below the limit. One way to do this is by putting more money into retirement accounts that have tax benefits such as those mentioned earlier. This is just one way to save money on your taxes as a business owner.
Consider Estate Tax-Planning Techniques
Estate tax-planning techniques can also be an effective way to reduce current-year tax liability. For 2023, the lifetime exemption for assets that can be given gift-tax free is $12.92 million for individuals and $25.84 for married couples.
The annual gift tax exclusion has also been increased to $17,000 per recipient in 2023, up from $16,000 in 2022. This is the annual amount taxpayers can give tax-free without using any of the above-mentioned lifetime exemption. Not only that, but the annual exclusion applies on a per-person basis, so each taxpayer can give $17,000 (up from $16,000 in 2022) per person to any number of people per year.
Though gifting and other estate tax-planning strategies are not tax-deductible, they can help to significantly reduce your taxable estate over time.
Make Sure Your Advisory Team Is Working Together
Beyond consulting with a tax professional, you’ll want to be sure your entire financial team is working together to provide cohesive oversight and guidance. This should include professionals like CPAs, financial advisors, investment advisors, and estate attorneys. Your finances don’t exist in a bubble and so neither will your tax-minimization strategies. When your advisory team works together, strategies are easier to identify and execute, and proactive tax solutions become much easier to implement, reducing stress and your tax bill.
Start Saving Today
Using these tips can actually turn tax season from something stressful and complicated to something you might look forward to (we’re not kidding!) because of all the savings you could experience! Beyond this, though, partnering with someone who knows both your life and the complexities of life can give you confidence throughout the entire process.
At Investment and Insurance Planning Services, LLC, we strive to build a plan that is uniquely tailored to your goal and future dreams. To schedule a complimentary call to discuss your current financial planning considerations or investment concerns and see if our services are a match for your needs, contact us today at service@davidblountIIPS.com or (407) 542-3249. You can also send us a message here.
About David
David is President and CEO of Investment & Insurance Planning Services, LLC (IIPS), an independent and fee-based firm that helps clients establish their financial goals and creates custom financial plans to help them pursue those goals. They specialize in working with pre-retirees, individuals in a career transition, L3 Harris engineers, and JetBlue pilots. David’s motivation comes from seeing his clients pursue their goals. He says, “It’s very rewarding to help people make successful transitions from one career to another, start a small business, or retire.”
David received his bachelor’s degree from Troy University, and prior to becoming a financial planner in 2000, he had a nine-year career in the United States Coast Guard. He obtained the CERTIFIED FINANCIAL PLANNER™ designation in 2007. He has served as the guest financial expert on Orange Television’s Adult Lifestyle Magazine Show and frequently provides financial and retirement planning workshops. Outside of work, he enjoys spending time with his wife, Michelle, their two kids, Ryan and Alana, their dog, Jack, and visiting with friends. An avid outdoorsman, he enjoys fishing, hiking, exercise, and as a committed person of faith, he enjoys attending church and is passionate about helping people in his community. To learn more about David, connect with him on LinkedIn.
This material was prepared for David J. Blount’s use.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Examples are hypothetical and for illustrative purposes only.
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